Forums: Discussions for entrepreneurs and small business.

Good Afternoon Entrepreneur - I've recently started an IT recruiting firm and I have went back and forth on if I should file as an LLC or a S-corp. I see many benefits to each. The number one item that is keeping me from going with an LLC is the 15.3% self employment tax and the 2% medicare tax saved that is saved with S-Corps. I am the employee at the moment and will be for at least another year. I work out of my home and my startup costs are less than 15,000. Not counting the opportuntiy lost (Salary and bonus) of not working for another firm. Any insight on this subject would be greatly appreciated.

Thanks,

I do not believe you are saving the 15.3 self employment tax or the Medicare tax with either of these structures. They are both passed through to the individual tax return of the owner(s). The difference is that the s-corp pays part 7.xx and the employee pays the other part from the paycheck deduction.

So, really you are paying them both still, just from different accounts.

The real difference between the various structures has to do with stock types and investors. Except C-corps, that are truly separate entities altogether.

You might be wise to check out more information on these and talk with your accountant to see which makes better sense for you and your situation. More information can be seen at http://en.wikipedia.org/wiki/Corporation

Not true.  You will save the SE tax with an S-Corp but it's not as good as it sounds at first.  You only save the 15.3% on the difference between your salary and ~$90K or is it $106K now?  Anyway, say you pay yourself $30K and if the limit is $90K you save $60K*15.3% = ~$9K or thereabouts.

That is the quick and dirty calculation.  Look up the details there are some I am forgetting but I did all the research and discussed with my accountant before I S-Corp in March of 09.

-Josh

Check out: http://en.wikipedia.org/wiki/S_corporation

It has all the info on a S-Corp. If you are really saving on the taxes, then you can go for that option.

tlinde,

I agree with JMann as well.  I've been researching this, as I'm starting a solo consulting business.  I too am struggling with the LLC vs. S-Corp decision.

I think the S-Corp structure is best for us, but the downside is the extra paperwork and meetings that must take place with an S-Corp.

To really make it matter, you must bring in more than a "reasonable" salary.  I'm not sure I will, at least for the first few years.

Can anyone comment on how difficult it is to maintain an S-Corp?  I haven't been able to see much online in regards to everything that must be done every year (i.e. a list of items).

Nick

While the S corporation's special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners. An LLC may offer several classes of membership interests while an ‘S’ corporation may only have one class of stock.

Any number of individuals or entities may own interests in an LLC. However, ownership interest in an ‘S’ corporation is limited to no more than 100 shareholders. Also, ‘S’ corporations cannot be owned by ‘C’ corporations, other S corporations, many trusts, LLCs, partnerships, or nonresident aliens. Also, LLCs are allowed to have subsidiaries without restriction.

Hello friends,

Check out http://www.residual-rewards.com/llcvsscorp.html for the difference between LLC and S-Corp.

Thanks.

Here is a good explaination from my CPA:

http://www.scorporationsexplained.com/llcsexplained-scorporations.htm

http://www.scorporationsexplained.com/

To muddy the waters more you can be an LLC and elect to be taxed as an S corp.  Typically, from what I have seen people start with an S corp to early- they don't have the income to justify the additional costs/administrative burdens.  It is something that can be addressed down the road.

I have always used the quick and dirty dollar figure of 30K. If you make more than 30K in profits as a sole prop. it is worth it to pay the extra costs associated with the S Corporation.  S Corporations have additional tax returns to file, legal fees and usually a state business tax of some kind.

I would also refer to the fact that you can be an LLC filing as a Sole Prop, Partnership or S Corporation. So, you would say, "I am an LLC filing as a Partnership" or whichever enty you choose. An LLC is a state entity, there is not a form at the Federal level for an LLC.

I hope this helps!